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ABSTRACT
This paper investigates the gross investment behavior in a panel of 97 developing countries spanning a period between 1973 and 2002. Fixed Effect Model is employed to analyze data. Variance Inflation Factor (VIF) test is conducted to ensure that the data are free from multicollinearity. Also, Granger Causality test is conducted to see if reverse causality exists. 2- Step 1st Difference Generalized Method of Moments (GMM) dynamic panel estimator has been employed to offset unobserved heterogeneity and endogeneity of regressors. The results suggest that investment decisions still seem to be significantly affected by traditional determinants such as growth, domestic savings, trade openness etc. The variable aid appeared to potentially affect investment which calls for developing country's measures to ensure proper utilization of it. However, we failed to highlight the effect of real interest rate and uncertainty on investment attributing the former to macroeconomic volatility and latter to lack of data on corruption index.
JEL Classifications: E22, O16, O23
Keywords: investment, panel data, developing countries
Corresponding Author's Email Address: [email protected]
INTRODUCTION
Investment is the nucleus of an economy. It plays a crucial role in the models of economic growth. It is an essential component of aggregate demand and fluctuations in investment have considerable effect on economic activity and long term economic growth. Most developing countries during the last few decades have been characterized by changes in economic regimes that have severely conditioned capital accumulation. In order to contribute to the discussion of what determines gross investment, the main goal of this study is to identify the variables that significantly influence investment decisions in developing countries.
The theories of investment date back to Keynes (1936) who first advocated an independent investment function in the economy. The central feature of Keynesian analysis is the observation that savings and investment must be identical ex post but there is no reason why ex-ante savings should equal ex-ante investment. Since the era of Keynes, there have been several hypotheses concerning macroeconomic variables that play a decisive role in explaining investment behavior. Keynesians have traditionally favored the accelerator theory of investment while disregarding the role of factor costs. Jorgenson (1971) and others have formulated the neoclassical approach which is a version of the flexible accelerator model. In this approach, the...